SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
- Securities and Exchange Act of 1934
For the Quarterly period ended March 31, 2004
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or
_ Transition report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from ________________ to ___________________.
Commission File No. 1-9727
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Franklin Capital Corporation
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(Exact name of registrant specified in its charter)
Delaware 13-3419202 .
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 20th Floor, New York, New York 10022 .
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323 .
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes No X
--- ---
The number of shares of common stock outstanding as of May 14, 2004 was
1,020,100.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
Statement of Operations
Financial Condition
Investments
Results of Operations
Taxes
Liquidity and Capital Resources
Risk Factors
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying financial statements
reflects all adjustments that are, in the opinion of management, necessary for a
fair presentation of the results for the interim period presented.
3
FRANKLIN CAPITAL CORPORATION
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BALANCE SHEETS
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(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
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ASSETS
Marketable investment securities, at market value (cost: March 31,
2004 - $26,249 and December 31, 2003 - $40,899) (Notes 2 and 6) $ 180,812 $ 33,899
Investments, at fair value (cost: March 31, 2004 - $1,850,000;
December 31, 2003 - $1,908,804) (Notes 2 and 6)
Excelsior Radio Networks, Inc. 1,803,662 1,921,270
Other investments 1,000,000 1,000,000
------------ ------------
2,803,662 2,921,270
------------ ------------
Cash and cash equivalents (Note 2) 98,896 224,225
Other assets 73,095 78,638
------------ ------------
TOTAL ASSETS $ 3,156,465 $ 3,258,032
============ ============
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable (Note 6) $ 915,754 $ 915,754
Accounts payable and accrued liabilities 376,183 318,140
------------ ------------
TOTAL LIABILITIES 1,291,937 1,233,894
------------ ------------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend: 5,000,000
shares authorized; 10,950 issued and outstanding at March 31, 2004 and
December 31, 2003, respectively
(Liquidation preference $1,095,000) (Note 4) 10,950 10,950
Common stock, $1 par value: 5,000,000 shares authorized;
1,505,888 shares issued: 1,020,100 shares outstanding
at March 31, 2004 and December 31, 2003 (Note 7) 1,505,888 1,505,888
Paid-in capital 10,439,610 10,439,610
Unrealized appreciation of investments 1,108,225 1,005,466
Accumulated deficit (8,583,313) (8,320,944)
------------ ------------
4,481,360 4,640,970
Deduct: 485,788 shares of common stock held in treasury,
at cost, at March 31, 2004 and December 31, 2003 (Note 4) (2,616,832) (2,616,832)
------------ ------------
Net assets (Note 9 for per share information) 1,864,528 2,024,138
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,156,465 $ 3,258,032
============ ============
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The accompanying notes are an integral part of these
financial statements.
4
FRANKLIN CAPITAL CORPORATION
================================================================================
STATEMENTS OF OPERATIONS
(UNAUDITED)
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
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INVESTMENT INCOME
Interest income $ 165 $ 678
Management fees -- 45,000
--------- ---------
165 45,678
--------- ---------
EXPENSES
Salaries and employee benefits 128,901 175,565
Professional fees 57,000 30,000
Rent 18,075 9,172
Insurance 17,038 17,413
Directors' fees 2,000 2,001
Taxes other than income taxes 12,764 15,969
Depreciation and amortization -- 4,244
Interest expense 8,926 8,850
General and administrative 48,144 56,191
--------- ---------
292,848 319,405
--------- ---------
Net investment loss from operations (292,683) (273,727)
Net realized gain (loss) on portfolio of investments: Investment securities:
Affiliated 58,804 --
Unaffiliated (9,326) --
--------- ---------
Total investment securities 49,478 --
--------- ---------
Net realized loss on portfolio of investments (243,205) (273,727)
(Decrease) increase in unrealized appreciation of investments: Investment
securities:
Affiliated (58,804) 47,544
Unaffiliated 7,000 --
Other increase in unrealized appreciation (Note 6) 154,563 --
--------- ---------
Total investment securities 102,759 47,544
--------- ---------
Net decrease in net assets from operations (140,446) (226,183)
Preferred dividends 19,164 19,164
--------- ---------
Net decrease in net assets attributable to
common stockholders ($159,610) ($245,347)
========= =========
Basic and diluted net decrease in net assets per common share (Note 8) ($ 0.16) ($ 0.23)
========= =========
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The accompanying notes are an integral part of these
financial statements.
5
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF CASH FLOWS
(UNAUDITED)
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
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Cash flows from operating activities:
Net decrease in net assets from operations ($140,446) ($226,183)
Adjustments to reconcile net decrease in net assets to net
cash used in operating activities:
Depreciation and amortization -- 4,244
Increase in unrealized appreciation of investments (102,759) (47,544)
Net realized gain on portfolio of investments (49,478) --
Changes in operating assets and liabilities:
Decrease (increase) in other assets 5,543 (33,032)
Increase (decrease) in accounts payable and accrued liabilities 58,043 (43,959)
--------- ---------
Total adjustments (88,651) (120,291)
--------- ---------
Net cash used in operating activities (229,097) (346,474)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable investment securities 20,572 --
Proceeds from sale of securities in affiliate 117,608 --
Purchases of securities in affiliate -- (87,444)
Purchases of marketable investment securities (15,248) --
--------- ---------
Net cash provided by (used in) investing activities 122,932 (87,444)
--------- ---------
Cash flows from financing activities:
Payment of preferred dividends (19,164) (19,164)
Decrease in note payable -- (3,706)
Purchases of treasury stock -- (10,005)
--------- ---------
Net cash used in financing activities (19,164) (32,875)
--------- ---------
Net decrease in cash and cash equivalents (125,329) (466,793)
Cash and cash equivalents at beginning of period 224,225 562,191
--------- ---------
Cash and cash equivalents at end of period $ 98,896 $ 95,398
========= =========
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The accompanying notes are an integral part of these
financial statements.
6
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
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Decrease in net assets from operations:
Net investment loss ($ 292,683) ($ 273,727)
Net realized gain on portfolio of investments 49,478 --
Increase in unrealized appreciation of investments 102,759 47,544
----------- -----------
Net decrease in net assets from operations (140,446) (226,183)
Capital stock transactions:
Payment of dividends on preferred stock (19,164) (19,164)
Purchase of treasury stock -- (10,005)
----------- -----------
Total decrease in net assets (159,610) (255,352)
Net assets at beginning of period 2,024,138 3,267,540
----------- -----------
Net assets at end of period $ 1,864,528 $ 3,012,188
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The accompanying notes are an integral part of these
financial statements.
7
FRANKLIN CAPITAL CORPORATION
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PORTFOLIO OF INVESTMENTS
(UNAUDITED)
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MARKETABLE INVESTMENT SECURITIES
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MARKET
NUMBER OF VALUE
MARCH 31, 2004 (2) SHARES COST(1) (NOTE 2)
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Principal Financial Group common stock (Note 6) 4,338 -- $ 154,563
Certificate of Deposit - 0.7%, due 05/03/2004 $ 26,249 26,249
---------- ----------
Total Marketable Investment Securities (6.1% of total investments and 9.7% of net assets) $ 26,249 $ 180,812
========== ==========
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Investments, at Fair Value
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DIRECTORS'
EQUITY NUMBER OF VALUATION
MARCH 31, 2004 (2) INVESTMENT INTEREST SHARES COST(1) (NOTE 2)
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MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock 34.00% 850,000 $ 850,000 $1,700,000
Excelsior Radio Networks, Inc. Warrants - 87,111 -- 103,662
---------- ----------
Total Excelsior Radio Networks, Inc. (60.4% of total
investments and 96.7% of assets) 13.01% 850,000 1,803,662
(Radio production and advertising sales) (fully diluted)
OTHER INVESTMENTS
Alacra Corporation (33.5% of total investments Convertible Preferred 1.68% 321,543 1,000,000 1,000,000
and 56% of net assets) Stock
(Internet-based information provider)
Total Other Investments 1,000,000 1,000,000
---------- ----------
Investments, at Fair Value $1,850,000 $2,803,662
========== ==========
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(1) Book cost equals tax cost for all investments
(2) Total investments refers to investments and marketable investment
securities.
The accompanying notes are an integral part of these
financial statements.
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
1. DESCRIPTION OF BUSINESS
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation operating as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and making available managerial expertise to
companies that do not have ready access to capital through conventional
financial channels. Such companies are termed "eligible portfolio companies".
The Corporation, as a BDC, generally may invest in other securities; however,
such investments may not exceed 30% of the Corporation's total asset value at
the time of any such investment.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,000,000 at March 31, 2004. (Working
capital is defined as total liabilities less liquid assets.) This condition
raises substantial doubt about the Corporation's ability to continue as a going
concern. The Corporation is currently seeking financing. There can be no
assurance that the Corporation would be able to obtain alternative financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments such as money market funds and commercial paper with
maturities of 90 days or less at the date of their acquisition to be cash
equivalents.
The Corporation paid no interest or income taxes during the three months ended
March 31, 2004 and 2003.
At March 31, 2004 and 2003, the Corporation held cash and cash equivalents
primarily in money market funds at one commercial banking institution.
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or Nasdaq
Stock Market are stated at the last reported sales price on the day of valuation
or, if no sale was reported on that date, then the securities are stated at the
last quoted bid price. The Board of Directors of Franklin (the "Board of
Directors") may determine, if appropriate, to discount the value where there is
an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined in good faith by
the Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (C0NTINUED)
eventually realized from each investment may vary from the valuations shown and
the differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
GAINS (LOSSES) ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains (losses) are measured by the difference
between the proceeds of sale or exchange and the cost basis of the investment
without regard to unrealized gains (losses) reported in the prior periods. Gains
(losses) are considered realized when sales or dissolution of investments are
consummated.
INCOME TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. Therefore, the Corporation is taxed under Regulation C.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The significant components of deferred tax assets and liabilities are
principally related to the Corporation's net operating loss carryforward and its
unrealized appreciation of investments.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method at rates based upon estimated useful lives for the
respective assets. Leasehold Improvements are included in other assets and are
amortized over their useful lives or the remaining life of the lease, whichever
is shorter.
NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
Net increase (decrease) in net assets attributable to common stockholders per
common share is calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
3. INCOME TAXES
For the three months ended March 31, 2004, and 2003, Franklin's tax (provision)
benefit was based on the following:
2004 2003
---------- ----------
Net investment loss from operations $ (292,683) $ (273,727)
Net realized gain on portfolio of investments 49,478 --
Increase in unrealized appreciation 102,759 47,544
---------- ----------
Pre-tax book loss $ (140,446) $ (226,183)
========== ==========
2004 2003
---------- ----------
Federal tax benefit at 34% on $(140,446) and
$(226,183), respectively ..................... $ 48,000 $ 77,000
Other .......................................... 1,000 7,000
Change in valuation allowance .................. (49,000) (84,000)
---------- ----------
$ -- $ --
========== ==========
Deferred income tax benefit reflects the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws.
At March 31, 2004 and 2003, significant deferred tax assets and liabilities
consist of:
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (C0NTINUED)
Asset (Liability)
----------------------------
March 31, December 31,
2004 2003
---------- -----------
Deferred Federal and state benefitfrom net
operating loss carryforward................... $2,691,000 $ 2,605,000
Deferred Federal and state (provision)
benefit on unrealized (appreciation)
depreciation of investments................... (414,000) (377,000)
Valuation allowance............................. (2,277,000) (2,228,000)
---------- -----------
Deferred taxes................................. $ -- $ --
========== ===========
At December 31, 2003, Franklin had net operating loss carryforwards for income
tax purposes of approximately $7,236,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $2,605,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at March 31, 2004, consists of accumulated net realized
gains of $5,555,000 and accumulated investment losses of $14,138,000.
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 575,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. As of March 31, 2004 and December 31, 2003,
the Corporation has purchased 536,950 shares of its common stock of which
485,788 shares remain in treasury.
PREFERRED STOCK -
The preferred stock has a cumulative 7% quarterly dividend and is convertible
into the number of shares of common stock by dividing the purchase price for the
convertible preferred stock by conversion price in effect (which is currently
$13.33). The convertible preferred stock has antidilution provisions, which can
change the conversion price in certain circumstances if the Corporation issues
additional shares of common stock. The holder has the right to convert the
shares of convertible preferred stock at any time until February 22, 2010 into
common stock. Upon liquidation, dissolution or winding up of the Corporation,
the stockholders of the convertible preferred stock are entitled to receive $100
per share plus any accrued and unpaid dividends before distributions to any
holder of the Corporation's common stock.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments through December 31, 2004 of $105,000.
Rent expense for the three months ended March 31, 2004 and 2003, was
approximately $18,000 and $9,000, respectively. For the three months ended March
31, 2004, and 2003, the Corporation collected rents of $9,000 from one subtenant
under a month-to-month lease, for a portion of its existing office space that is
reflected as a reduction in rent expense for that period.
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin, Sunshine Wireless, LLC ("Sunshine"), and four
other defendants affiliated with Winstar Communications, Inc. On February 25,
2003, the case against Franklin and Sunshine was dismissed, however the
plaintiffs have a right to appeal. The lawsuit alleges that the Winstar
defendants conspired to commit fraud and breached their fiduciary duty to the
plaintiffs in connection with the acquisition of the plaintiff's radio
production and distribution business. The complaint further alleges that
Franklin and Sunshine joined the alleged conspiracy. The plaintiffs seek
recovery of damages in
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (C0NTINUED)
excess of $10,000,000, costs and attorneys' fees. An unfavorable outcome in an
appeal, should it be brought, together with an unfavorable outcome in the
lawsuit may have a material adverse effect on Franklin's business, financial
condition and results of operations.
6. MARKETABLE INVESTMENT SECURITIES AND INVESTMENTS AT FAIR VALUE
Franklin valued its position in Excelsior at $2.00 per common share based on the
sale of 58,804 common shares to Sunshine on March 19, 2004 and the receipt of an
unsolicited non-binding expression of interest by Excelsior from a third-party
at a price greater than $2.00 per common share.
Franklin issued a $1,000,000 note as part of the purchase price of Excelsior.
This note was due February 28, 2002 with interest at 3.54% but has a right of
set-off against certain representations and warranties made by Winstar Radio
Networks, Inc. The due date of the note has been extended indefinitely until the
action described in Note 5 is settled.
On October 1, 2002, Franklin received 74,232 warrants to acquire shares of
Excelsior common stock at an exercise price of $1.20 per share for arranging a
refinancing of Excelsior debt.
During the three months ended March 31, 2003, Franklin earned $45,000 in
management fees and was reimbursed $36,000 for salary and benefits for
Franklin's chief financial officer, which was recorded as a reduction of
expenses on Franklin under a management services agreement between Franklin and
Excelsior. The agreement expired on December 31, 2003.
Franklin along with Sunshine initially purchased Excelsior on August 28, 2001.
On October 3, 2002, Franklin sold 773,196 common shares for $1.94 per share for
$1,500,000 realizing a gain of $726,804. On January 31, 2003, Franklin purchased
and subsequently on May 29, 2003, Franklin cancelled the purchase, 33,750 common
shares for $1.625 per share and 65,199 warrants to acquire shares of Excelsior
common stock at an exercise price of $1.125 per share for $0.50 per warrant. On
August 12, 2003, Franklin sold 193,000 common shares for $1.30 per share for
$250,900 realizing a gain of $57,900. Franklin has stock appreciation rights on
these common shares as follows, a) in the event that Excelsior is sold on or
before August 8, 2004 for gross proceeds of no less than $40,000,000, then
Franklin shall be entitled to receive fifty percent (50%) of any net value above
$1.30 per share not to exceed total proceeds to Franklin of $1.94 per share, and
b) in the event that Excelsior is sold on or before August 8, 2005 for gross
proceeds of no less than $40,000,000, then Franklin shall be entitled to receive
fifty percent (50%) of any net value above $1.30 per share not to exceed
proceeds to Franklin of $1.625 per share. On October 8, 2003, Franklin sold to
Sunshine 375,000 shares of the common stock of Excelsior for an aggregate
purchase price of $750,000, realizing a gain of $375,000, pursuant to a stock
purchase agreement between Sunshine and Franklin. On March 19, 2004, Franklin
sold to Sunshine 58,804 shares of the common stock of Excelsior for an aggregate
purchase price of $117,608, realizing a gain of $58,804, pursuant to a stock
purchase agreement between Sunshine and Franklin. Franklin has stock
appreciation rights on the common shares sold on both October 8, 2003 and March
19, 2004, such that if Excelsior is sold and the purchaser of the common shares
from Franklin receives more than $3.50 per share, Franklin is entitled to
receive 80% of the value greater than $3.50 per share. There can be no guarantee
that Franklin will be able to continue to sell shares of Excelsior to Sunshine.
After giving effect to the purchase of the common stock, Sunshine owns 66% and
the Corporation owns 34% of the issued and outstanding common stock, and voting
power, of Excelsior. On a fully diluted basis, after giving effect to the
exercise of the outstanding warrants and the conversion of Sunshine's
outstanding preferred stock of Excelsior into common stock, the Corporation owns
approximately 13% of Excelsior.
In 2001, Franklin maintained group life and dental insurance with Principal
Financial Group ("PFG"). Upon the demutualization of PFG in October 2001,
Franklin received 4,338 common shares of PFG. However, Franklin did not receive
any notification for the receipt of such shares. In 2004 Franklin became aware
of its ownership of PFG common shares, and recorded the fair value of such
shares ($154,563 at March 31, 2004) within marketable
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (C0NTINUED)
investments on the accompanying balance sheet and as other increase in
unrealized appreciation in the accompanying statement of operations.
7. STOCK OPTION PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside" directors, (i.e., those directors who are not
also officers or employees of Franklin). 112,500 shares of the Corporation's
Common Stock have been reserved for issuance under these plans, of which 67,500
shares have been reserved for the SIP and 45,000 shares have been reserved for
the SOP. Shares subject to options that terminate or expire prior to exercise
will be available for future grants under the Plans. Because the issuance of
options to "outside" directors is not permitted under the Act without an
exemptive order by the Securities and Exchange Commission, the issuance of
options under the SOP was conditioned upon the granting of such order. The order
was granted by the Commission on January 18, 2000.
The following is a summary of the status of the Stock Option Plans during the
three months ended:
March 31, 2004 March 31, 2003
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning
of year 20,625 $11.39 20,625 $11.39
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
------ -------- ------ --------
Outstanding at end of year 20,625 $11.39 20,625 $11.39
====== ======
Exercisable at end of year 20,625 $11.39 20,625 $11.39
====== ======
Weighted average fair
value of options granted -- --
The options issued under the SIP have a remaining contractual life of 4.8 years.
The options issued under the SOP have a remaining contractual life of 6.8 years.
8. NET DECREASE IN NET ASSETS PER COMMON SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
March 31,
---------------------------
2004 2003
---------------------------
Numerator:
Net decrease in net
assets from operations ($140,446) ($226,183)
Preferred stock dividends ( 19,164) ( 19,164)
---------- -----------
Numerator for basic and diluted
earnings per share - net increase in net
assets attributable to common stockholders ($159,610) ($245,347)
========== ===========
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (C0NTINUED)
Denominator:
Denominator for basic and diluted
decrease in net assets from operations -
weighted - average shares 1,020,100 1,045,187
========== ===========
Basic and diluted net decrease in net assets
from operations per share $( 0.16) $ (0.23)
========== ===========
Common shares which would be issued upon conversion of the Corporation's
preferred stock or exercise of options have been excluded from the dilutive per
share computation as they are antidilutive (see Notes 4 and 7):
Period Ended March 31,
----------------------------
2004 2003
----------------------------
Preferred stock convertible into common stock 82,125 82,125
Stock options 20,625 20,625
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
------------------------------
March 31, December 31,
2004 2003
------------------------------
Numerator:
Numerator for net asset value per
common share, as if converted basis $ 1,864,528 $ 2,024,138
Liquidation value of convertible preferred stock (1,095,000) (1,095,000)
----------- -----------
Numerator for net asset value per share
attributable to common stockholders $ 769,528 $ 929,138
=========== ===========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,020,100 1,020,100
Number of shares of common stock to be
issued upon conversion of preferred stock 82,125 82,125
----------- -----------
Denominator for net asset value per common
share as if converted basis 1,102,225 1,102,225
Net asset value per share attributable to common
stockholders $ 0.75 $ 0.91
=========== ===========
Net asset value per common share, as if converted basis
$ 1.69 $ 1.84
=========== ===========
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, aggregated $15,248 and $138,180, respectively,
for the three months ended March 31, 2004; $87,446 and $0, respectively, for the
three months ended March 31, 2003.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following "Overview" section is a brief summary of the significant
issues addressed in Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A"). Investors should read the relevant sections
of the MD&A for a complete discussion of the issues summarized below. The entire
MD&A should be read in conjunction with Item 1. Financial Statements appearing
elsewhere in this Form 10Q.
OVERVIEW
During the three months ended March 31, 2004, the Corporation realized
approximately $50,000 in gains on its sale of Excelsior common stock. The
Corporation continues to rely on the increase in the value of its investments
and the ability to sell them in order to fund its ongoing operations. In 2001,
Franklin maintained group life and dental insurance with PFG. Upon the
demutualization of PFG in October 2001, Franklin received 4,338 common shares of
PFG. However, Franklin did not receive any notification for the receipt of such
shares. In 2004 Franklin became aware of its ownership of PFG common shares, and
recorded the fair value of such shares ($154,563 at March 31, 2004) within
marketable investments on the accompanying balance sheet and as other increase
in unrealized appreciation in the accompanying statement of operations.
CRITICAL ACCOUNTING POLICIES
Franklin's discussion and analysis of its financial condition and
results of operations are based upon the Corporation's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Corporation to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Corporation evaluates its estimates, the most critical of which are those
related to the fair value of the portfolio of investments.
Security investments which are publicly traded on a national exchange
or Nasdaq Stock Market are stated at the last reported sales price on the day of
valuation or, if no sale was reported on that date, then the securities are
stated at the last quoted bid price. The Board of Directors of Franklin (the
"Board of Directors") may determine, if appropriate, to discount the value where
there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at
cost and, thereafter, at fair value based upon the financial condition and
operating results of the issuer and other pertinent factors as determined in
good faith by the Board of Directors. The financial condition and operating
results have been derived utilizing both audited and unaudited data. In the
absence of a ready market for an investment, numerous assumptions are inherent
in the valuation process. Some or all of these assumptions may not materialize.
Unanticipated events and circumstances may occur subsequent to the date of the
valuation and values may change due to future events. Therefore, the actual
amounts eventually realized from each investment may vary from the valuations
shown and the differences may be material. Franklin reports the unrealized gain
or loss resulting from such valuation in the Statements of Operations.
15
STATEMENT OF OPERATIONS
The Corporation accounts for its operations under accounting principles
generally accepted in the United States for investment companies. On this basis,
the principal measure of its financial performance is captioned "Net (decrease)
increase in net assets from operations," which is composed of the following:
o "Net investment loss from operations," which is the difference between
the Corporation's income from interest, dividends and fees and its
operating expenses;
o "Net realized gain on portfolio of investments," which is the
difference between the proceeds received from dispositions of portfolio
securities and their stated cost;
o any applicable income tax provisions (benefits); and
o "Net (decrease) increase in unrealized appreciation of investments,"
which is the net change in the fair value of the Corporation's
investment portfolio, net of any (decrease) increase in deferred income
taxes that would become payable if the unrealized appreciation were
realized through the sale or other disposition of the investment
portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net
(decrease) increase in unrealized appreciation of investments" are directly
related. When a security is sold to realize a gain, the net unrealized
appreciation decreases and the net realized gain increases. When a security is
sold to realize a loss, the net unrealized appreciation increases and the net
realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$3,156,465 and $1,864,528 at March 31, 2004, versus $3,258,032 and $2,024,138 at
December 31, 2003. Net asset value per share attributable to common shareholders
and on an as if converted basis was $0.75 and $1.69, respectively at March 31,
2004, versus $0.91 and $1.84 at December 31, 2003.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Investments, at cost $1,876,249 $1,949,703
Unrealized appreciation 1,108,225 1,005,466
---------- ----------
Investments, at fair value $2,984,474 $2,955,169
========== ==========
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,000,000 at March 31, 2004. This condition
raises substantial doubt about the Corporation's ability to continue as a going
concern. There can be no assurance that the Corporation would be able to find a
suitable merger partner or be able to obtain alternative financing. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
16
INVESTMENTS
The Corporation's financial condition is dependent on the success of
its investments. The Corporation has invested a substantial portion of its
assets in thinly capitalized companies including one development stage company
that may lack management depth.
ALACRA CORPORATION
At March 31, 2004, the Corporation had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 31.7% of the
Corporation's total assets and 53.6% of its net assets. Alacra, based in New
York, is a leading global provider of business and financial information. Alacra
provides a diverse portfolio of fast, sophisticated online services that allow
users to quickly find, analyze, package and present mission-critical business
information. Alacra's customers include more than 750 leading financial
institutions, management consulting, law and accounting firms and other
corporations throughout the world.
On April 20, 2000, the Corporation purchased $1,000,000 worth of Alacra
Series F Convertible Preferred Stock. Franklin has the right to have the
preferred stock redeemed by Alacra for face value plus accrued dividends on
December 31, 2005. In connection with this investment, Franklin was granted
observer rights on Alacra board of directors meetings.
EXCELSIOR RADIO NETWORKS
At March 31, 2004, the Corporation had an investment in Excelsior Radio
Networks, Inc. ("Excelsior"), formerly known as eCom Capital, Inc., valued at
$1,803,662, which represents 57.1% of the Corporation's total assets and 96.7%
of its net assets. This valuation represents the same value as the last sales
price realized by the Corporation for sales of 58,804 and 375,000 shares of
Excelsior's common stock on March 19, 2004 and October 8, 2003, respectively.
Excelsior produces and syndicates programs and services heard on more than 2,000
radio stations nationwide across most major formats. Through its Dial
Communications Global Media sales subsidiary, Excelsior sells the advertising
inventory radio stations provide in exchange for the Excelsior content. The
programming and content includes prep services as well as long form and short
form programming. Additionally, Dial Communications Global Media has a number of
independent producer clients, which range from talk and music programs to news
and traffic services.
On August 28, 2001, the Corporation purchased $2,500,000 worth of
Excelsior Common Stock and issued a secured note for $150,000. In connection
with this note, Franklin was granted warrants to acquire 12,879 shares of
Excelsior common stock at an exercise price of $1.125 per share. As of December
31, 2003, the secured note was paid back to Franklin. Franklin sold 250,000
common shares for $1.00 per share on December 4, 2001 for no gain or loss. On
October 1, 2002, Franklin received 74,232 warrants to acquire shares of
Excelsior common stock at an exercise price of $1.20 per share for arranging a
financing of Excelsior. On October 3, 2002, Franklin sold 773,196 common shares
for $1.94 per share for total proceeds of $1,500,000 realizing a gain of
$726,804. On January 31, 2003, Franklin purchased and subsequently on May 29,
2003, Franklin cancelled the purchase, 33,750 common shares for $1.625 per share
and 65,199 warrants to acquire shares of Excelsior common stock at an exercise
price of $1.125 per share for $0.50 per warrant. On August 12, 2003, Franklin
sold 193,000 common shares for $1.30 per share for total proceeds of $250,900
realizing a gain of $57,900. Franklin has stock appreciation rights on these
common shares as follows, a) in the event that Excelsior is sold on or before
August 8, 2004 for gross proceeds of no less than $40,000,000, then Franklin
shall be entitled to receive fifty percent (50%) of any net value above $1.30
per share not to exceed proceeds to Franklin of $1.94 per share, and b) in the
event that the Excelsior is sold on or before August 8, 2005 for gross proceeds
of no less than $40,000,000, then Franklin shall be
17
entitled to receive fifty percent (50%) of any net value above $1.30 per share
not to exceed proceeds to Franklin of $1.625 per share. On October 8, 2003,
Franklin sold to Sunshine 375,000 shares of the common stock of Excelsior for an
aggregate purchase price of $750,000, realizing a gain of $375,000, pursuant to
a stock purchase agreement between Sunshine and Franklin. On March 19, 2004,
Franklin sold to Sunshine 58,804 shares of common stock of Excelsior for an
aggregate purchase price of $117,608, realizing a gain of $58,804, pursuant to a
stock purchase agreement between Sunshine and Franklin. Franklin has stock
appreciation rights on the common shares sold on both October 8, 2003 and March
19, 2004, such that if Excelsior is sold and the purchaser of the common shares
from Franklin receives more than $3.50 per share, Franklin is entitled to
receive 80% of the value greater than $3.50 per share. After giving effect to
the purchase of the common stock, Sunshine owns 66% and the Company owns 34% of
the issued and outstanding common stock, and voting power, of Excelsior. On a
fully diluted basis, after giving effect to the exercise of the outstanding
warrants and the conversion of Sunshine's outstanding preferred stock of
Excelsior into common stock, the Corporation owns approximately 13% of
Excelsior. Franklin continues to maintain a seat on the board of directors of
Excelsior.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES:
The Corporation's principal objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital appreciation and
provides little or no current yield in the form of dividends or interest. The
Corporation earns interest income from loans, preferred stocks, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had investment income of $165 and $45,678 for the three
months ended March 31, 2004 and 2003, respectively. The decrease in investment
income for the three months ended March 31, 2004 when compared to March 31,
2003, was primarily the result of the management agreement with Excelsior that
expired on December 31, 2003.
Operating expenses were $292,848 and $319,405 for the three months
ended March 31, 2004 and 2003, respectively. A majority of the Corporation's
operating expenses consist of employee compensation, office and rent expense,
other expenses related to identifying and reviewing investment opportunities and
professional fees. Included in compensation is a $40,000 bonus paid to an
officer of the Corporation during 2003. Professional fees consist of general
legal fees, audit and tax fees and investment related legal fees. The
Corporation was reimbursed approximately $36,000 for salary and benefit expense
for its chief financial officer under the terms of the management agreement with
Excelsior for the three months ended March 31, 2003. This reimbursement has been
recorded as a reduction in operating expenses.
Net investment losses from operations were $292,683 and $273,727 for
the three months ended March 31, 2004 and 2003, respectively.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating
18
expenses. Because such sales cannot be predicted with certainty, the Corporation
attempts to maintain adequate working capital to provide for fiscal periods when
there are no such sales.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the three months ended March 31, 2004 and 2003, the Corporation
realized net losses before taxes of $49,478 and $0 respectively, primarily from
the disposition of a portion of the Corporation's Excelsior holdings.
UNREALIZED APPRECIATION OF INVESTMENTS:
Unrealized appreciation of investments, increased by $102,759 during
the three months ended March 31, 2004, primarily due to the receipt of shares in
Principal Financial Group ("PFG"), offset by an unrealized loss due to the sale
of a portion of the Corporation's Excelsior holdings. In 2001, Franklin
maintained group life and dental insurance with PFG. Upon the demutualization of
PFG in October 2001, Franklin received 4,338 common shares of PFG. However,
Franklin did not receive any notification for the receipt of such shares. In
2004 Franklin became aware of its ownership of PFG common shares, and recorded
the fair value of such shares ($154,563 at March 31, 2004) within marketable
investments on the accompanying balance sheet and as other increase in
unrealized appreciation in the accompanying statement of operations.
Unrealized appreciation of investments, increased by $47,544 during the
three months ended March 31, 2003, primarily from unrealized gains in Excelsior.
TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. The Corporation is taxed under Regulation C of the Code and,
therefore, it is subject to federal income tax on the portion of its taxable
income and net capital as well as such distribution to its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,000,000 at March 31, 2004. This condition
raises substantial doubt about the Corporation's ability to continue as a going
concern. The Corporation is seeking alternative financing. There can be no
assurance that the Corporation would be able to obtain alternative financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
Cash and cash equivalents decreased by $125,329 to $98,896 for the
three months ended March 31, 2004, compared to a decrease of $466,793 for the
three months ended March 31, 2003.
Operating activities used $229,097 of cash for the three months ended
March 31, 2004, compared to using $346,474 for the three months ended March 31,
2003.
19
Operating activities for the three months ended March 31, 2004,
exclusive of changes in operating assets and liabilities, used $292,683 of cash,
as the Corporation's net decrease in net assets from operations of $140,446
included non-cash charges for unrealized gains of $102,759 and net realized
gains of $49,478. For the three months ended March 31, 2003, operating
activities, exclusive of changes in operating assets and liabilities, used
$269,483 of cash, as the Corporation's net decrease in net assets from
operations of $226,183 included non-cash charges for depreciation and
amortization of $4,244 and unrealized gains of $47,544.
Changes in operating assets and liabilities increased cash $63,586 for
the three months ended March 31, 2004, principally due to an increase in the
level of accounts payable and accrued expenses and a decrease in other assets.
For the three months ended March 31, 2003, changes in operating assets and
liabilities resulted in the use of $76,991 of cash.
The principal factor in the $122,932 cash provided by investing
activities for the three months ended March 31, 2004 was the sale of common
shares of Excelsior. For the three months ended March 31, 2003, the $87,444 cash
used in investing activities was the purchase of additional common shares and
warrants of Excelsior.
Cash used in financing activities for the three months ended March 31,
2004 of $19,164 was for preferred dividends. Financing activities for the three
months ended March 31, 2003 used $32,875 primarily from the payment of preferred
dividends of $19,164 and the purchase of treasury stock of $10,005.
RISK FACTORS
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in small private companies and one bulletin board listed public
corporation. Because of the speculative nature of these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Corporation expects that from time to time its venture capital
investments may result in a complete loss of the Corporation's invested capital
or may be unprofitable. Other investments may appear likely to become
successful, but may never realize their potential. Neither the Corporation's
investments nor an investment in the Corporation is intended to constitute a
balanced investment program. The Corporation has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. The
Corporation's portfolio consists primarily of investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which Franklin invests, and Franklin relies significantly
on the diligence of its employees and agents to obtain information in connection
with the Corporation's investment decisions. In addition, some smaller
businesses have narrower product lines and market shares than their competitors,
and may be more vulnerable to customer preferences, market conditions or
economic downturns, which may adversely affect the return on, or the recovery
of, the Corporation's investment in such businesses.
THE PORTFOLIO OF INVESTMENTS IS ILLIQUID. Franklin acquires most of its
investments directly from private companies. The majority of the investments in
its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most
20
of the portfolio may adversely affect Franklin's ability to dispose of loans and
securities at times when it may be advantageous to liquidate such investments.
FRANKLIN'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS
DETERMINED BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC
MARKET VALUES. Pursuant to the requirements of the 1940 Act, the Corporation's
board of directors is required to value each asset quarterly, and Franklin is
required to carry the portfolio at a fair market value as determined by the
board of directors. Since there is typically no public market for the loans and
equity securities of the companies in which Franklin makes investments, the
board of directors estimates the fair value of these loans and equity securities
pursuant to written valuation policy and a consistently applied valuation
process. Unlike banks, Franklin is not permitted to provide a general reserve
for anticipated loan losses; instead, Franklin is required by the 1940 Act to
specifically value each individual investment and record an unrealized loss for
an asset that it believes has become impaired. Without a readily ascertainable
market value, the estimated value of the portfolio of loans and equity
securities may differ significantly from the values that would be placed on the
portfolio if there existed a ready market for the loans and equity securities.
Franklin adjusts quarterly the valuation of the portfolio to reflect the board
of directors' estimate of the current realizable value of each investment in the
Corporation's portfolio. Any changes in estimated value are recorded in the
Corporation's statement of operations as "Net unrealized gains (losses)."
FRANKLIN OPERATES IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
Franklin competes for investments with many other companies and individuals,
some of whom have greater resources than does Franklin. Increased competition
would make it more difficult to purchase or originate investments at attractive
prices. As a result of this competition, sometimes Franklin may be precluded
from making otherwise attractive investments.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Corporation's quarterly operating results could
fluctuate, and therefore, you should not rely on quarterly results to be
indicative of Franklin's performance in future quarters. Factors that could
cause quarterly operating results to fluctuate include, among others, variations
in the investment origination volume, variation in timing of prepayments,
variations in and the timing of the recognition of realized and unrealized gains
or losses, the degree to which Franklin encounters competition in its markets
and general economic conditions.
FRANKLIN IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE SUCCESS.
Franklin is dependent for the selection, structuring, closing and monitoring of
its investments on the diligence and skill of its senior management members and
other management members. The future success of the Corporation depends to a
significant extent on the continued service and coordination of its senior
management team, particularly the Chairman and Chief Executive Officer. The
departure of any of the executive officers or key employees could materially
adversely affect the Corporation's ability to implement its business strategy.
Franklin does not maintain key man life insurance on any of its officers or
employees.
THERE IS SUBSTANTIAL DOUBT AS TO FRANKLIN'S ABILITY TO CONTINUE AS A
GOING CONCERN. Franklin has determined that it may not have sufficient cash and
cash equivalents to meet its working capital requirements over the next fiscal
year. Franklin's independent auditors have issued an opinion in which the
independent auditors have indicated that there is substantial doubt as to
Franklin's ability to continue as a going concern as noted in their explanatory
paragraph within their opinion, which is noted in Franklin's annual financial
statements. Franklin is
21
currently seeking alternative sources of financing to continue operating through
the current fiscal year. If funds were not raised, Franklin may not be able to
continue its operations.
INVESTMENT IN SMALL, PRIVATE COMPANIES
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in private development stage or start-up companies. These private
businesses tend to be thinly capitalized, unproven, small companies with risky
technologies that lack management depth and have not attained profitability or
have no history of operations. Because of the speculative nature and the lack of
a public market for these investments, there is significantly greater risk of
loss than is the case with traditional investment securities. The Corporation
expects that some of its venture capital investments will be a complete loss or
will be unprofitable and that some will appear to be likely to become successful
but never realize their potential. The Corporation has been risk seeking rather
than risk averse in its approach to venture capital and other investments.
Neither the Corporation's investments nor an investment in the Corporation is
intended to constitute a balanced investment program. The Corporation has in the
past relied, and continues to rely to a large extent, upon proceeds from sales
of investments rather than investment income to defray a significant portion of
its operating expenses.
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Corporation are or will be equity
securities acquired directly from small companies. The Corporation's portfolio
of equity securities is and will usually be subject to restrictions on resale or
otherwise have no established trading market. The illiquidity of most of the
Corporation's portfolio of equity securities may adversely affect the ability of
the Corporation to dispose of such securities at times when it may be
advantageous for the Corporation to liquidate such investments.
THE INABILITY OF THE CORPORATION'S PORTFOLIO COMPANIES TO SUCCESSFULLY
MARKET THEIR PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON ITS INVESTMENT
RETURNS
Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Corporation's portfolio companies may not be
successful.
VALUATION OF PORTFOLIO INVESTMENTS
There is typically no public market of equity securities of the small
private companies in which the Corporation invests. As a result, the valuation
of the equity securities in the Corporation's portfolio is subject to the good
faith determination of the Corporation's Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of the Corporation's
portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity securities
existed. Any changes in estimated net asset value are recorded in the
Corporation's statement of operations as "Change in unrealized appreciation on
investments."
22
FLUCTUATIONS OF QUARTERLY RESULTS
The Corporation's quarterly operating results could fluctuate as a
result of a number of factors. These include, among others, variations in and
the timing of the recognition of realized and unrealized gains or losses, the
degree to which the Corporation encounters competition in its markets and
general economic conditions. As a result of these factors, results for any one
quarter should not be relied upon as being indicative of performance in future
quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's business activities contain elements of risk. The
Corporation considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act and in the
applicable regulations of the Securities and Exchange Commission. All assets are
valued at fair value as determined in good faith by, or under the direction of,
the Board of Directors.
Neither the Corporation's investments nor an investment in the
Corporation is intended to constitute a balanced investment program. The
Corporation has exposure to public-market price fluctuations to the extent of
its publicly traded portfolio.
The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. These private businesses tend
to be thinly capitalized, unproven, small companies that lack management depth
and have not attained profitability or have no history of operations. Because of
the speculative nature and the lack of public market for these investments,
there is significantly greater risk of loss than is the case with traditional
investment securities. The Corporation expects that some of its venture capital
investments will be a complete loss or will be unprofitable and that some will
appear to be likely to become successful but never realize their potential.
Because there is typically no public market for the equity interests of
the small companies in which the Corporation invests, the valuation of the
equity interests in the Corporation's portfolio is subject to the estimate of
the Corporation's Board of Directors. In making its determination, the Board may
consider valuation information provided by an independent third party or the
portfolio company itself. In the absence of a readily ascertainable market
value, the estimated value of the Corporation's portfolio of equity interests
may differ significantly from the values that would be placed on the portfolio
if a ready market for the equity interests existed. Any changes in valuation are
recorded in the Corporation's consolidated statements of operations as "Net
increase (decrease) in unrealized appreciation on investments."
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's chief executive officer and chief financial officer
have evaluated the effectiveness of the Corporation's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) as of a date (the "Evaluation Date")
within 90 days before the filing date of this annual report. Based on such
evaluation, they have concluded that, as of the Evaluation Date, the information
required to be disclosed by the Corporation in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
23
There were no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these controls
during the period covered by this quarterly report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit against Franklin, Sunshine Wireless, LLC
("Sunshine"), and four other defendants affiliated with Winstar Communications,
Inc. On February 25, 2003, the case against Franklin and Sunshine was dismissed,
however the plaintiffs have a right to appeal. The lawsuit alleges that the
Winstar defendants conspired to commit fraud and breached their fiduciary duty
to the plaintiffs in connection with the acquisition of the plaintiff's radio
production and distribution business. The complaint further alleges that
Franklin and Sunshine joined the alleged conspiracy. The plaintiffs seek
recovery of damages in excess of $10,000,000, costs and attorneys' fees. An
unfavorable outcome in an appeal, should it be brought, together with an
unfavorable outcome in the lawsuit may have a material adverse effect on
Franklin's business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES HOLDERS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 31.1 Certification of the Chief Executive
Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities
Exchange Act, as amended
Exhibit 31.2 Certification of the Chief Financial
Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities
Exchange Act, as amended
Exhibit 32.1 Certification of Chief Executive
Officer Pursuant To 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 Certification of Chief Financial
Officer Pursuant To 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
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(b) REPORTS ON FORM 8-K. The Corporation filed a report on
Form 8-K on April 1, 2004 announcing
its Board of Directors had
authorized the retention of a
financial advisor to advise Franklin
on various strategic, financial and
business alternatives available to
it to maximize shareholder value.
These may include a reorganization,
re-capitalization, acquisitions,
dispositions of assets, a sale or
merger. There is no assurance that
any of the foregoing alternatives
will occur.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: May 14, 2004 By: /s/ Stephen L. Brown
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Stephen L. Brown
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Hiram M. Lazar
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Hiram M. Lazar
CHIEF FINANCIAL OFFICER
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